Question

Ravine Corporation purchased 30 percent ownership of Valley Industries for $88,500 on January 1, 20X6, when Valley had capital stock of $253,000 and retained earnings of $42,000. The following data were reported by the companies for the years 20X6 through 20X9:

Dividends Declared

Year Operating Income,
Ravine Corporation Net Income,
Valley Industries Ravine Valley
20X6 $ 151,000 $ 39,000 $ 77,000 $ 29,000
20X7 94,000 59,000 77,000 49,000
20X8 236,000 10,000 97,000 40,000
20X9 171,000 49,000 107,000 29,000


Required:
a.
What net income would Ravine Corporation have reported for each of the years, assuming Ravine accounts for the intercorporate investment using the cost method and the equity method?

b-1. Give all appropriate journal entries for 20X8 that Ravine made under the cost method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b-2. Give all appropriate journal entries for 20X8 that Ravine made under the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field

Answer 1

Dividends Declared

Year --- Operating Income, Ravine Corporation -- Net Income, Valley Industries - Dividends Declared Ravine -- Dividends Declared Valley

20X6 -$151,000 -- $ 39,000 $ 77,000 $ 29,000

20X7 $94,000 59,000 77,000 49,000

20X8 $236,000 10,000 97,000 40,000

20X9. $171,000 49,000 107,000 29,000

Answer:

Cost Method

Using Cost Method, we'll calculate net income using the following formula:

=> Net income of Ravine + Ownership interest x Dividends declared of Valley Company

But in 20X8, the dividend is greater than the net income.

So, the dividend that will be recorded is

Dividends to reported (20X8) = ($40,000 - $10,000) = $30,000

Year Computation Net income to be reported

20X6 $151,000 + 30% x $29,000 $159,700

20X7 $94,000 + 30% x $49,000 $108,700

20X8 $236,000 + 30% x $30,000 $245,000

20X9 $171,000 + 30% x $29,000 $179,700

Equity Method

The formula to compute the net income to be reported in the books of Ravine Company is:

Net income = Net income of Ravine + Ownership interest x Net income of Valley

Year Computation Net income to be reported

20X6 $151,000 + 30% x $39,000 $162,700

20X7 $94,000 + 30% x $59,000 $111,700

20X8 $236,000 + 30% x $10,000 $239,000

20X9 $171,000 + 30% x $49,000 $185,700

b.

The amount of cash received is equal to dividends declared.

Cash received = $40,000 x 30% = $12,000

We credit in investment in Valley Stock equal to net income of the subsidiary.

Investment in Valley = 30% x $10,000 = $3,000

We also credit dividend income which is the difference between the cash received and the investment in Valley,

Dividend income = $12,000 - $3,000 = $9,000

Debit Credit

Cash $12,000

Investment in Valley $9,000

Dividend income $3,000